Brazil inflation ends ’15 above target, central bank vows action

BRASILIA: Brazil’s inflation rate closed 2015 at the highest level in more than 12 years, above 10 percent, overshooting the government’s target and prompting the central bank to vow action to curb prices despite a deepening recession.

In a public letter explaining why policymakers missed the target, central bank chief Alexandre Tombini reaffirmed that the bank will take the necessary measures to curb prices, signaling a rate hike despite calls from some politicians and government peers against it.

Consumer prices as measured by the benchmark IPCA index BRCPI=ECI rose 10.67 percent in 2015, statistics agency IBGE said on Friday, well above the official target range of between 2.5 and 6.5 percent.

Tax hikes, high public spending and a strong El Nino contributed to Brazil’s 2015 inflation being more than predicted when the year started.

Tombini said a weaker real and a sharp increase in government-controlled prices were also behind the surge in inflation, which is stoking discontent among Brazilians struggling with what could be the worst recession in a century.

Although the central bank expects inflation to ease back to the target range this year policymakers are under tremendous pressure to avoid resuming rate hikes at its next meeting on Jan. 20.

More rate increases could further complicate the political standing of President Dilma Rousseff, who is scrambling to strengthen her leftist support base in Congress to survive impeachment proceedings.

The head of her Workers’ Party, Rui Falcao, has publicly called on the bank not to resume rate hikes that could further sink an economy expected to contract 3 percent this year. Economists believe the economy contracted 4 percent in 2015.

Most Brazilians have lived through waves of hyperinflation until the creation of the real currency in 1994. At 14.25 percent, the Brazilian central bank benchmark Selic rate is the highest among major global economies.

Although the current price spike is not nearly as severe as previous episodes of runaway inflation, it has helped erode the popularity of Rousseff struggling with a massive corruption scandal involving dozens of lawmakers from her Workers’ Party and allied parties.

Brazil’s inflation is set against a backdrop of deflation fears elsewhere in the world, caused by slowing Chinese growth and falling oil and commodities prices. Most of Brazil’s price pressures are homegrown, underpinned by loose fiscal policy and successive increases in the minimum wage regardless of productivity gains.

Finance Minister Nelson Barbosa said in a separate note that his ministry will help the central bank by rebalancing the fiscal accounts and increasing the productivity of the economy.

Barbosa, a leftist economist who replaced fiscal hawk Joaquim Levy as finance minister in December, is trying to convince skeptic investors that he will not relax the unpopular austerity drive.

Economists expect Brazil’s inflation rate to peak in a few months and close the year at just below 7 percent, still above the government’s target, according to a central bank poll.